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ETFs to Tap Facebook's New Highs Ahead of Q2 Earnings

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Social media giant Facebook is set to release second-quarter fiscal 2018 results on Jul 25 after market close.

Investors should note that Facebook has easily shrugged off concerns over the data-privacy scandal involving Cambridge Analytica that broke in mid-March. It has seen smooth trading over the past three months, gaining 32.1% and beating the industry’s growth of 13.7%. In fact, the stock has touched new highs in the recent trading session on earnings optimism (read: 5 Undervalued Tech ETFs at Investors' Disposal).

The outperformance is likely to continue given the positive earnings revision trend, which is generally a precursor to an earnings beat, and attractive fundamentals though earnings surprise is difficult to predict at this time.

Inside Our Methodology

Facebook has a Zacks Rank #2 (Buy) and an Earnings ESP of -0.67%, implying that a beat cannot be predicted this quarter. According to our surprise prediction methodology, a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) when combined with a positive Earnings ESP makes us confident in predicting an earnings beat. A Zacks Rank #4 or 5 (Sell rated) is best avoided going into the earnings announcement, especially when the company is seeing negative estimate revisions. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

The stock has seen positive earnings estimate revision of a penny over the past seven days for the second quarter. Analysts raising estimates right before earnings — with the most up-to-date information possible — is a pretty good indicator for the stock. Additionally, Facebook’s earnings surprise history is robust with the company delivering a positive earnings surprise of 18.89% on average over the past four quarters. It is expected to post solid earnings growth of 32.58% and revenue growth of 44.09% for Q2 (read: A Spread of ETFs to Tap the Dip in FANGs).

Further, the stock belongs to a top-ranked Zacks Industry (top 29%) with a top Growth and Momentum Score of A each. However, a Value Style Score of D look unfavorable. According to the analysts polled by Zacks, Facebook has an average target price of $228.21, with nearly 97% of the analysts giving a Strong Buy or a Buy rating ahead of the company’s earnings. This represents 7.6% upside from the current price.

What to Watch?

With stalling user growth globally and especially in North America, investors will be keen to watch the growth in Instagram, on which the company has much focus now. Last month, the social media giant revealed that the photo and video-sharing app had become Facebook's fourth billion-user platform, following Facebook, WhatsApp, and Messenger.

The company is also investing heavily in security and preventing abuse, video content, and long-term initiatives, which center on augmented and virtual reality, artificial intelligence and connectivity. As such, its operating expenses are expected to increase 50-60% this year, higher than 32% recorded in 2017. This would have a significant impact on the company's profitability.

ETFs in Focus

Given Facebook's attractive fundamentals, investors could focus on ETFs having the largest allocation to the social media giant. While there are several ETFs in the space having FB in their basket, we have highlighted seven funds that have the social media giant in their top five holdings (see: all the Technology ETFs here):

Communication Services Select Sector SPDR (XLC - Free Report) – The ETF has been newly debuted to track the new communication services sector of the S&P 500 index and has accumulated $284.8 million already. Facebook takes the top spot with 21.4% of the portfolio (read: 5 Successful New ETFs of Q2).

Global X Social Media Index ETF (SOCL - Free Report) — The fund has amassed $189 million in its asset base and carries a Zacks ETF Rank #3 (Hold) with a High risk outlook. Facebook takes the second spot with 11.8% allocation.

First Trust Dow Jones Internet Index (FDN - Free Report) — The fund has AUM of $9.5 billion and has a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook. Here, FB occupies the second position, accounting for 9% share.

iShares Dow Jones US Technology ETF (IYW - Free Report) — This product has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook and has amassed $4.3 billion in AUM. Facebook is the third firm with 8.7% allocation (read: 5 Top-Ranked Tech ETFs to Buy on Strong PC Growth).

Invesco NASDAQ Internet ETF (PNQI - Free Report) — It has AUM of $711.1 million and a Zacks ETF Rank #1 with a High risk outlook. Here, Facebook takes the second spot with 8.3% share.

Select Sector SPDR Technology ETF (XLK - Free Report) – The fund has $22.6 billion in AUM and carries a Zacks ETF Rank #2 with a Medium risk outlook. Facebook occupies the third position and accounts for 7.5% share.

iShares Evolved U.S. Technology ETF (IETC - Free Report) – This fund debuted in the space in late March and has accumulated $5.4 million in its asset base. Facebook takes the fourth spot, making up for 7.2% share.

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